For years the dominant case for owning bitcoin was simple: buy it, secure it and wait. That proposition is changing. Bitcoin is increasingly being used as collateral for loans, trading facilities and institutional credit, giving holders access to cash or stablecoins without requiring them to sell the underlying asset. The appeal is obvious. An investor who believes bitcoin will appreciate may prefer to borrow against it rather than dispose of it. A company holding bitcoin in its treasury could obtain working capital while maintaining its long-term position. Traders and market makers can use bitcoin to secure financing for other activities. But once bitcoin becomes collateral, a volatile investment becomes the foundation of a debt obligation. That changes the risk. A borrower who pledges R500,000 worth of bitcoin for a R150,000 loan begins with a loan-to-value ratio of 30%. If the value of the bitcoin falls to R300,000, the ratio rises to 50%, even though the borrower has not borrowed any additional money. Interest charges increase the outstanding debt further, pushing the loan-to-value ratio even higher. If the ratio reaches the lender’s liquidation threshold, some or all of the bitcoin may be sold automatically. The borrower can be liquidated even if the price later recovers. This is why the maximum amount a platform is prepared to lend should not be treated as a sensible target. It represents the outer limit of the product, not a prudent borrowing level. The market is developing through several competing models. Centralised platforms such as Kraken and Binance offer crypto-secured borrowing to eligible customers. The process is relatively familiar. A user transfers collateral to the platform, receives a loan and monitors the position through an account dashboard. The trade-off is custody. The borrower must trust the lender to hold the bitcoin securely, apply its liquidation rules correctly and return any remaining collateral. The legal treatment of bitcoin during an insolvency can matter as much as the interest rate. Decentralised finance takes a different approach. A borrower deposits a token representing bitcoin into a smart contract and borrows stablecoins or another asset. Protocols such as Aave automatically calculate collateral ratios and allow third-party liquidators to close positions that fall below required safety levels. This reduces reliance on a traditional lender, but it does not remove trust. It shifts trust toward smart contracts, price oracles, governance systems and the infrastructure supporting wrapped bitcoin. That final point is important. Most decentralised lending markets cannot use native bitcoin directly. They rely on tokens such as WBTC, cbBTC or tBTC, each of which introduces another layer of custody, redemption, signer or smart-contract risk. A borrower may therefore be exposed simultaneously to bitcoin volatility, a wrapped asset, a lending protocol and the stablecoin received from the loan. Institutions are also moving into the market. Bitcoin-backed credit facilities increasingly resemble conventional secured finance, using professional custodians, collateral managers and bankruptcy-remote vehicles. The objective is to combine crypto’s continuous settlement with the legal controls familiar to institutional lenders. The largest unresolved issue may be rehypothecation. This occurs when a lender reuses pledged bitcoin to secure its own borrowing or trading activity. Reuse can lower financing costs, but it can also create chains of claims against the same collateral. The lesson from previous crypto credit failures is that proof of assets is not enough. Investors must also understand liabilities, collateral reuse and creditor rights. Borrowing against bitcoin can be rational when it serves a defined purpose, such as temporary working capital or a short-term liquidity need. It becomes far more dangerous when the proceeds are used to buy more bitcoin and repeat the process. That strategy does not make bitcoin productive; it creates leverage. Bitcoin may become one of the digital economy’s most important collateral assets. Its success in that role will depend less on how much can be borrowed against it and more on whether lenders, protocols and borrowers can survive the next major decline. • Muchena is founder of Proudly Associated and author of ‘Artificial Intelligence Applied’ and ‘Tokenized Trillions’.Business Day